Internet TV Isn't Ready to Displace Cable Just Yet

But “cord-cutting” is growing in popularity, and cable companies are already feeling the pinch.

Roku founder Anthony Wood runs a startup that, along with companies like Apple and Microsoft, sells hardware that’s bringing Web video to home television screens. It’s no wonder his nine-year-old daughter prefers to watch her favorite Disney shows on Netflix at her whim, rather than surf Disney’s own 24-hour cable channel.

This is one example of how traditional TV service providers are losing their hold on America’s eyeballs. Internet-connected TVs are becoming the norm on store shelves, and today represent 12 percent of those in people’s homes, according to a recent survey by NPD Group. These TVs, and devices like Roku’s, make it easier for viewers to cut the cord on their expensive cable bills, and instead simply watch content provided by companies including Netflix, Hulu, Apple, Amazon, and Google on their big home screens.

Yet Wood hasn’t canceled his family’s TV service, and neither have the majority of his customers. In fact, several factors may make “cord-cutting” slower than anticipated.

Wood cited statistics at the Next TV Summit, held recently in San Francisco, that about 35 percent of its three-million-plus Roku set-top box owners, with access to 600 free and paid content apps, wind up either ending or reducing their pay TV packages. But 10 percent were never cable or satellite subscribers in the first place. And there are still more than 100 million cable and satellite subscribers in the U.S.

As the Roku figures suggest, cord-cutting is happening, so far, on a relatively small scale. For example, Nielsen reported that the number of households that have only broadband Internet and free broadcast channels increased by 631,000 in 2011. Meanwhile, 1.5 million homes ended TV service from cable, satellite, or telecommunications providers that same year.

In other words, the massive wave of migration is not materializing as fast as many Internet companies might hope, or as fast as cable companies and networks may fear. “So far, it doesn’t seem like it’s the tipping point,” says Fox Networks distribution president Michael Hopkins.

One major reason is that most Internet platforms don’t yet provide crucial live content—such as news and sports—nor the original programming that draws viewers in (rather than reruns or held-back content).

That is starting to change, though, and it is likely that the cord-cutting trend will continue to gradually pick up steam. Netflix is now developing its own exclusive and original content. Meanwhile, Microsoft recently paid PBS to shoot 50 percent more hours of content of Sesame Street, which it then developed into an early example of “interactive” TV for Xbox Kinect. And Google-owned YouTube, which has sports, news, and entertainment divisions just like a network broadcaster, not long ago invested $100 million to seed the creation of high-quality content intended for cable-like channels. So far it is pleased with the results—20 channels averaging more than one million monthly views, and 25 with some 100,000 “subscribers,” according to Alex Carloss, YouTube’s head of entertainment.

The cable and satellite TV incumbents are, unsurprisingly, determined to retain their subscribers, and at the Next TV conference, some believed they will feel pressure to give customers more freedom to pick and choose which channels they want to access instead of paying for a large bundle.

In 2009, for example, TimeWarner and Comcast launched “TV Everywhere,” an authentication technology that is allowing them to make their shows easily available on any kind of screen to paying subscribers. Broadcast TV, too, is also aiming to offer access to live content on other devices (see “Broadcast TV Aims for Your Smartphone”).

Wood believes it won’t be long before an “incumbent” launches Internet-based versions of their cable packages. “A lot of this is about getting access to the content,” says Wood. “That’s a business that requires complicated negotiations, requires a lot of money, and I think, a lot of experience.” HBO recently launched a channel for the Web, HBO Go, but customers must be existing subscribers to HBO through a cable provider.

As more people stream TV content on their home screens, infrastructure limitations could become a factor. Will Law, Akamai Technologies’ principal architect in its media division, says if there were a sudden spike in TV streaming far above today’s levels, “there would be massive congestion collapse.”

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I’m MIT Technology Review’s business editor, working from our San Francisco office. I’m interested in how new technologies enter and rise in the marketplace, and in how they create new businesses and affect established ones.

Before… More joining MIT Technology Review, I covered energy policy, technology, and business for ClimateWire from our fine nation’s capital. I also did the crazy startup thing, serving as an editor at Change.org as it grew rapidly in a short 18 months.

Before going into journalism, I was an environmental geologist working on contaminated waste sites in New York City. That’s when I realized that I’d rather report and write about the fumes than breathe them in.